MARK TRAHANT, SEATTLE POST-INTELLIGENCER COLUMNIST

Published 10:00 pm, Saturday, August 21, 2004

Every election season is a good time to talk about tax reform because any thinking politician is quick to promise lower taxes, simpler taxes or fairer taxes.

It's ridiculous to even imagine the flip side, a campaign that says, "The tax code is great. I like the complexity of IRS rules. I like the time I spend looking back on my year, sorting through receipts and marveling on what it means to be a U.S. citizen."

But in our political debates, we tend to talk only about certain taxes.

The income tax is fair game. So, too, are taxes on capital gains, estates and even the income tax penalty for marriage (while ignoring the fact that some of us reap a marriage bonus from the tax code).

Recently President Bush mentioned what he termed an "interesting idea" of replacing the complicated income tax system with a national sales tax. Bush and his aides are hinting that tax reform might be at the top of their list for a second-term agenda.

But what would a sales tax include? Everything? Would a sales tax eliminate the payroll tax? I bet it's not even a part of the idea.

A couple of weeks ago I had a chance to hear the president talk about taxes.

"We didn't play favorites in the tax code. We said, 'If you're paying taxes, you ought to get relief.' Seems to make a fair way to me to make policy," he said. "So everybody who paid taxes got relief."

But that's not exactly correct -- unless you add the word "income" before the word "taxes" -- because more Americans are hit harder by payroll taxes.

More than 70 percent of all taxpayers now pay more in payroll taxes -- mostly for Social Security and Medicare -- than they do in income taxes. The total collected is projected to reach $747 billion in the current fiscal year, just short of the $762 billion collected in income tax revenue. Both taxes collect about 41 percent of federal revenue -- but just four years ago, payroll taxes accounted for only 32 percent of federal revenue.

This money is designated for special trust funds, a fiction that distorts the federal budget, the deficit and the nation's obligations in the future. But this is the very reason why the payroll tax is not often included in tax reform discussions.

When I asked Bush about a payroll tax cut, he said: "Well, obviously, I chose to provide tax relief by income tax cuts, not by payroll tax cuts, and the reason why is payroll tax will affect the solvency of Social Security. So I chose not to deal with the payroll tax."

But the payroll tax has significant implications for most Americans. For some households with incomes below the median, the marginal tax rates are about 50 percent (including both income and payroll), according to the Economic Policy Institute. This is a tax on working people. Switch the source of the money around, say, most of the household income is generated from capital gains (a preferred tax) instead of labor, then the rate might not exceed 15 percent.

But beyond fairness, the payroll tax makes it that much more difficult for businesses to hire new workers. Under the law, employers pay half the tax. Already many businesses say they aren't hiring new workers because of the increasing cost of benefits, including medical care. But one part of that equation is also the increased cost of payroll taxes.

"Our unprecedented and still growing reliance on payroll taxes, as much as the increase in the budget deficit, is a matter of serious concern to all those who care about the economy," said Bob Walker, president of a group called Get America Working!

"A large budget deficit depresses national savings, but rising payroll tax reliance inflates hiring costs and depresses job creation. New job creation is vital ... (and) it should be our top economic priority."

The president said we don't play favorites with the tax code. If you're paying taxes, you ought to get relief. It's time to insert a new word before "taxes." Any discussion about relief and reform ought to include payroll tax because it's the most expensive for most Americans.